The Australian dollar ended the week relatively flat as the high-yielding currency struggled to hold above the 1.0600 figure, and the high-yielding currency may come under pressure in the week ahead should the economic docket continue to cast a weakened outlook for the region. At the same time, we may see market sentiment continue to taper off over the coming days as negative headlines coming out of the world economy saps risk-taking behavior, and the AUDUSD may continue to carve a lower top in August as it maintains the downward trend carried over from 2011.

Although the Reserve Bank of Australia kept the benchmark interest rate at 3.50% and held an improved outlook for the $1T economy, the central bank warned about the resilience in the local currency, and it seems as though Governor Glenn Stevens will maintain a dovish tone over the remainder of the year amid the slowdown in the global growth. Indeed, the slew of dismal data coming out of China – Australia’s largest trading partner – casts a dour outlook for the export-driven economy, and the central bank may continue to carry out its easing cycle throughout the second-half of the year as the persistent strength in the aussie ‘may be more contractionary for the economy than historical relationships suggest.’ In turn, we may see business sentiment deteriorate further in July, while the wage growth figures are at risk of fall short of market expectations in May amid the ongoing weakness in private sector activity. According to Credit Suisse overnight index swaps, market participants still see the board lowering the benchmark interest rate by at least 50bp over the next 12-months, and the ongoing weakness in interest rate expectations continues to cast a bearish outlook for the high-yielding currency as the RBA looks toward the domestic economy to strength the recovery.

As the relative strength index on the AUDUSD continues to find interim resistance around the 67 figure, the rally from June certainly appears to be tapering off, and we anticipate to see a bearish reversal in the exchange rate as long as the oscillator moves away from oversold territory. As a result, we may see the aussie-dollar work its way back towards the 23.6% Fibonacci retracement from the 2010 low to the 2011 high around 1.0370 to test for short-term support, but a round of positive developments may keep the high-yielding currency afloat as it dampens expectations for lower borrowing costs. – DS

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